Housing property rental and VAT Pro-rata

Tax implications for renting apartments and offices under the same company.

We have often been asked about the tax implications for renting a housing property owned by a Company, as they don´t know if this will affect the rest of their incomes received from their rentals of business offices.

The truth is that there are various points to take into consideration:

1. Differences between renting an office and renting an apartment.

In the first place, we must have clear the difference between renting an apartment or a business office, if they are both rented to carry out an economic activity, then there would be no doubt, we must apply the general type of VAT.

But on the other side, if the property is rented as a home, then we must know that this rental will be exempt of VAT, so the amount won’t be increased with the general type of VAT % (at the moment 21 %), according to article 20 of the Law 31/92, for Value Added Tax.

The problems appear with companies that invoice all their incomes with VAT, as the rest of their rentals are carried out to other companies for business offices, by obtaining a new income without VAT, the company would automatically enter a special VAT PRO-RATA regime.

The VAT pro-rata means that, if the 40 % of my incomes are generated without VAT and the other 60 % with VAT, then the 40 % of my VAT quotes in my expenses won’t be deductible from my tax declarations, which will suppose a considerable increase of my book keeping and tax control to prepare my periodic tax declarations and avoid penalties from Hacienda (Tax Office).  This is why company tax lawyers and advisors are a great support to help other companies deal with these situations.

In addition, a part from entering the VAT pro-rata, the company would also lose its right to apply the reversion of the taxable person for the purchase of a property or business office.  This is because to be able to apply the reversion, the buyer must have the right to deduct the total amount of VAT quotes at the time of the purchase. The reversion of the taxable person means that the buyer will avoid paying VAT for a purchase of a business office or property, this would save the buyer a lot of money, and this is why, once again, we must decide whether its rentable for the company to rent out a property as a home or not.

2. The rental of a property is in general exempt of VAT.

The housing rentals, with furniture, garages and storage rooms, rented jointly and mentioned within the rent contract, would be VAT exempt operations. These exemptions won’t be applied to those properties rented for mixed proposals, as a home and a business office. However, there are some exceptions which we explain below.

3. The rental of properties that offer hotel services.

The rental of furnished properties won’t be exempt of the tax, when the housekeeper agrees to give hotel services (room cleaning, clothes, sheets, towels washing, prepare and serve breakfast, lunch, dinner, etc.).

In which case, it’s important to assure that the company (or physic person) owner of the property, is able to give these services, either through an administrator, or by contracting or subcontracting the services. The easiest way to prove this activity to Hacienda, is by presenting an employment contract detailing the contracted services.

By law, the paragraph 23 of the article 20.1 of the VAT law says that the rental, or transfer for a price exchange of according to the paragraph ´´b´´, edifications intended to rent will be exempt of VAT. For this, the rental or transfer of properties (not business offices) will be exempt of VAT.

On the other side, the paragraph ´´e´´ of the article 20.1.23ª of the LIVA says that the exemption will not operate for those rentals of furnished properties where the housekeeper is obliged to offer hotel services. This means that in these cases the person who rents the property to the final user will have the obligation to issue an invoice and apply an additional % for VAT, which, at the moment would be 10 % for touristic rentals.

The hotel services recognized by the General Tax Direction are, cleaning of the living area and toilets, change of clothing (sheets, towels, etc.). Offering these services before and after the rental are not considered hotel services, as these must be carried out during the lessors stay not only before and after.

4. The rental of properties from companies to be used by their employees.

They are also not exempt of VAT those furnished properties rented by a company, to be used as a residence for their employees.

But in this last case, there are different High Courts of Justice in favor of the exemption of VAT for those properties rented by a company to be used by an employee of this same company as a home, always if the name of the person who will be living in the property appears in the renting contract, in a way that, as it says within other sentences from the TSJ of Madrid on the 27th of March 2014 (also the sentences from the TSJ Madrid on the 20th of February 2014, TSJ Madrid 13th of March 2014, TSJ Cataluña on the 21st of February 2014 or TSJ Madrid on the 9th of January 2014), this situation would be known before signing the rental contract and it will be proved that this would be a rental of an asset which will be used as a home,  as the contrary would mean that the property would be at the company´s disposition and it could be used for other purposes whenever it was convenient. Which wouldn’t offer a legal- taxable security to the owner.

Therefore, the rental of a property where the lessor is a company and its specified within in the renting contract that the apartment will be used by a physical person and appears in the same contract, this operation must be exempt of VAT.

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